Is It Better to Rent or Buy a Home?
27:05 Share

Audible's best of 2024 picks are here. Discover the year's top audiobooks, podcasts, and originals in all your favorite genres.

From memoirs and sci-fi to mysteries and thrillers, Audible's curated list in every category is the best way to hear 2024's best in audio entertainment. Like a stunning new full-cast production of George Orwell's 1984. Heartfelt memoirs like Supreme Court Justice Ketanji Brown Jackson's lovely one. The year's best fiction like The Women by Kristen Hanna and Percival Everett's brilliantly subversive James.

Audible. There's more to imagine when you listen. Go to audible.com slash imagine and discover all the year's best waiting for you. Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 435. It's titled, Is it Better to Rent or Buy a House?

The last few weeks, LaPerle and I have been traveling. We came from Tucson to Idaho, and then we've taken a trip over to the Oregon coast.

I usually take an early morning walk wherever I am. So I've taken early morning walks in Sedona, Santa Fe, Afton, Wyoming, Boise, Idaho, and then a number of towns in Oregon, including Bend, Corvallis, Medford, and Klamath Falls. That's just in the last month. Generally, I'm just admiring the houses, admiring the neighborhoods, the nature.

And for the most part, because I'm walking so early, there's not a whole lot of people outside walking. Sometimes there'll be some runners or individuals walking their dog, but mostly it's me and individuals experiencing homelessness that tend to be out walking very early. Now, there are multiple reasons for homelessness, and that isn't the topic of today's episode. But one of the primary drivers is the huge jump in

in housing cost and rent, particularly in large cities.

There was an article by three analysts, John Myers, Ben Southward, and Sam Bowman, and their thesis was housing costs are the root of many societal problems. And they give evidence of how a lack of housing is driving up prices over the past 40 years. They pulled data that shows the average New York City house rose significantly

706% since 1980 compared to 376% for U.S. consumer prices, so double the rate of inflation. San Francisco has seen their houses increase 932% since 1980. In London, home prices are up over 2100% in the last 40 years. 1450% increase in Sydney, Australia. And in Ireland,

Over that same period, we've seen home prices there increase 800%. Now, the rents have also jumped significantly over that same period. What's fascinating about that is housing costs are going up while the cost of many other things haven't.

Myers, Southwood, and Bowman point out that based on the number of hours it would take the median worker in the U.S. to work to buy certain goods, that costs are much, much lower. For example, in 1975, it took 60 hours for the median American worker to purchase a television. In 2013, it was 7 hours. A refrigerator took 65 hours for that median worker

wage-earning worker to purchase a refrigerator versus 20 hours in 2013. A treadmill would have cost 18 hours worth of work in 1975 versus 6 hours in 2013. And a washer-dryer, 67 hours in 1975 and 30 hours in 2013.

Automobiles are three times cheaper today than they were back in 1975 based on what the median worker earned, but not housing. And as a result, housing is becoming an ever-increasing percentage of household budgets, often requiring both partners or spouses having to work in order to afford a place to live.

Home prices have risen even more dramatically since the pandemic. In a number of episodes, we've talked about how the money supply, the cash, checking account balances, purchasing power has expanded by 40% since 2020 due to stimulus to help households because of the pandemic, as well as quantitative easing, the Federal Reserve and other central banks buying bonds.

huge jump in cash, and households were wealthier. They could buy more of a house, a more expensive house, combined because interest rates were rock bottom, under 3%. That pushed up the price of houses, and then households reassessed where they wanted to live. Many moved from the city to the suburbs.

I know Lepre and I, we made a move during the pandemic from Phoenix to Tucson once we realized that our Phoenix home was just too small for having three adult children that had come home because of the pandemic. They were working and doing their school online.

Other evidence of the dramatic increase in home prices, many of them in the South and Southwest. For example, Phoenix, since 2020, home prices have increased 57%, 61% in Austin, 62% in Tampa, and 57% in Charlotte. Overall, National Home Price Index, the Case-Shiller Home Price Index, rose

rose 21% from March 2021 to March 2022. Now, in the past year, price growth has slowed. The Case-Shiller National Home Index is only up 0.7% for the year ending March, and that's because mortgage rates have spiked.

And that has made houses much more unaffordable. The average mortgage rate right now, 30-year mortgage rate, 6.9%. Going back to 2018, it averaged 4% over that period. And much of the time from mid-2019 through early 2022, it was below 4%. Now it's 6.9%. So with the big jump in home prices, along with much higher mortgage rates,

Home prices are the least affordable they have been in the U.S. since 1985, and that's based on some work by Ned Davis Research, where they look at the median income family taking out a 30-year mortgage with

with 20% down, and paying the median priced home in the U.S., the least affordable since 1985. The most expensive housing markets in the U.S., according to Capital Economics, based on the percent of income that needs to be paid for a mortgage by the households living in that area, San Diego, where the average household is paying 60% of their income toward their mortgage. That's followed by L.A.,

Riverside, San Jose, and San Francisco. The cheapest areas based on the percent of income going to the mortgage payment would be Louisville and my hometown, Cincinnati, followed by Memphis and Indianapolis. Those are where houses are still relatively more affordable compared to the West and the Southeast.

Now, if you're in the market for a home, it's not easy to find one. There are fewer sales, less inventory. The U.S. home vacancy rate is 0.6%, the lowest since records began back in 1965. Many homeowners don't want to sell. They don't feel like they have to move because they've locked in a mortgage rate under 4%. And so we've seen

overall home sales fall 35% since their peak. Now, prices haven't really fallen very much. They've fallen in some areas of the country, but there's still a lack of inventory. And as we saw, the longer-term trends, going back to 1980, is for higher home prices. And the primary reason is there aren't enough homes. Some work that I found in the Financial Times showed the number of

dwellings, both houses and apartments, per 1,000 inhabitants. The developed country with the lowest supply of homes is Ireland. And that's one reason their home prices have increased 800% since 1980. Second, in terms of a housing shortage, is the U.S., followed by the U.K., and the Netherlands. So four countries that have seen their home prices increase dramatically because there just aren't enough homes.

The countries that have a much greater supply of homes per inhabitant is France, Italy, Portugal, and Finland.

Ned Davis Research estimates that the housing shortage in the U.S. is 2.5 million units. And that's based on just a lack of supply and then based on the basically new completions per year is about 1.5 million. But then there's about 200,000 of homes that are scrapped. Some are for vacation homes, but ultimately...

a two and a half million housing unit deficit. One reason and a primary reason there aren't enough homes are zoning restrictions. Cities, while they want people to move to their city and many are upset by the rate of homelessness, there definitely is a feeling of not in my backyard. They don't want higher densities in many cases.

Now that's starting to change, but that's been one of the primary reasons that home prices are skyrocketing. There's just not enough homes and it's not easy to build homes. One area of the home market that just isn't being built are starter homes. Our first home that LaPrele and I bought was a starter home. We bought it in 1993. We paid $72,000. It was a two-bedroom Cape Cod in

In Kettering, Ohio, it's about 900 square feet on the main level. It had an unfinished basement and a fairly unfinished attic. That would be equivalent to purchasing a $150,000 home today. And if you could, that'd be great. But that's incredibly rare to find a $150,000 home. Definitely not in Kettering. Today, only about 8% of new single-family homes

are less than 1,400 square feet. That compares to 70% or more in 1940s. Now, homeowners want more amenities, so homes are getting bigger, but it isn't just because of demand. There is a lot of demand for starter homes. The problem is the cost of the lots. The land itself has gone up

as well as the fees that builders have to pay. For example, many cities have impact fees, and those impact fees are a fee assessed on new home builds, as well as new apartment builds that go toward funding city parks or funding additional infrastructure. An example of a home builder that was in an article in the New York Times on starter homes,

In Oregon, it says a lot may cost $100,000 and then permits are another $40,000 to $50,000. There could be a tree that needs to be removed for $16,000. And so those costs add up. And so what home builders are having to do is build bigger homes in order to actually make a profit on the house.

Jerry Conter, a builder in Savannah, Georgia said, it's not that I don't want to build entry-level homes. It's that I can't produce one that I can make a profit on and sell to that potential purchaser.

Economists Giles Durant and Diego Puga looked at the cost of regulation, of not increasing the density, and they focused on New York. That if density in New York, what was allowed historically in terms of additional dwelling units, more apartments, etc., the city could double in size to 40 million, and it would have similar density as Paris.

And other cities, such as the Bay Area, Boston, Los Angeles, if they increase their density, more people could move there, and that would actually increase economic growth because of the interaction of households, of ingenuity, technology. Potentially, overall U.S. GDP could increase by 9%.

according to their study, and average income could go up. But there is room for houses. But the restrictions can be incredibly severe. There was another article in the New York Times that my son shared with me about Berkeley, where he lives, and just the fight to build some apartments around one of the metro stations that have been going on for decades.

It's incredibly difficult to build in some places, and that results in higher home prices. Now, things are starting to change, particularly in California. In 2016, California started to allow building of additional dwelling units. These are sometimes called casitas, mother-in-law suites, granny flats.

but they're an additional rental unit that can be put in the backyard. And as I understand it, the state basically passed this and it overrode any local regulation against that. And they're starting to see thousands and thousands of additional housing units in California because of that. Prior to this legislation and other legislations, I saw one report that apartments were

were technically illegal in 75 to 94% of the residential areas in the cities. And I just took a survey for the community we live in in Tucson, and they were addressing the housing units and asking what type of housing units we would want in our community.

And I said, yes, I'd want additional dwelling units. I would be fine with that. I would be fine with small houses. When it came to apartments, I wasn't so sure because of the additional traffic. But, you know, in some ways it's being hypocritical. We, I should have, I should have, and afterward, I wish I could have resubmitted the survey. I should have said yes for more apartments in our community because that is what it will take to survive.

solve the housing crisis in the U.S. and around the world. It is more supply, more flexible zoning, additional dwelling units, and it'll take time. But with a two and a half million unit deficit in the U.S., over time, as more units come online, that will keep housing prices from increasing dramatically.

Now, the one good news on the housing front is the number of apartments under construction is at an all-time high. There's about a million apartments around the U.S. that are coming online, multifamily units. And as a result of this new supply, the rental vacancy rate, while still below average, is now around 6.5% compared to the long-term average of 7.3%. And

with that supply that's actually pushed the price down of multifamily housing units. And so that gets to our question, should you rent or should you buy? For many years, I thought, well, it just makes sense to buy. That was the American dream. But my sons and I, we've been having this discussion. They both rent, we own, and in many ways, they think they want to continue to rent. They see an advantage here.

to renting. Before we continue, let me pause and share some words from this week's sponsors. Before we continue, let me pause and share some words from one of this week's sponsors, NetSuite.

What does the future hold for your business? Ask nine experts and you'll get 10 answers. Bull market, bear market, rates will rise or fall, inflation, up or down. Be great if we had a crystal ball, but we don't. Until then, over 38,000 businesses have future-proofed their business with NetSuite by Oracle, the number one cloud ERP, bringing accounting, financial management, inventory, HR into one fluid platform.

With one unified business management suite, there's one source of truth, giving you the visibility and control you need to make quick decisions. With real-time insights and forecasting, you're peering into the future with actionable data. When you're closing the books in days, not weeks, you're spending less time looking backwards and more time on what's next.

I know as our business grows, we'll certainly consider using NetSuite by Oracle. Now, whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities. Speaking of opportunity, download the CFO's Guide to AI and Machine Learning at netsuite.com slash david. The guide is free to you at netsuite.com slash david, netsuite.com slash david.

Knowing where our money's going and how it's being spent helps us feel more at peace. Monarch Money is a top-rated, all-in-one personal finance app. It gives you a comprehensive view of all your accounts, investments, transactions, and more.

You create custom budgets like we do, can track your progress toward financial goals, and collaborate with your partner. And now get an extended 30-day free trial when you go to monarchmoney.com slash david. Monarch is the most customizable budgeting app. You can change the layout of your dashboard, and I have done that.

You can toggle between light and dark mode. I haven't done that. But you can set up automatic rules for transactions so you're not having to fix it each and every time. And best of all, Monarch never sells your data to third parties or shows you ads.

After trying Monarch myself, I understand why it's a top-rated personal finance app. And right now, listeners of this show will get an extended 30-day free trial when you go to monarchmoney.com slash david. That's M-O-N-A-R-C-H-M-O-N-E-Y dot com slash david for your extended 30-day free trial.

Let's look at the numbers, both globally, but also what I've seen in my own life since we bought that first home back in 1993. I looked at two academic studies that looked at what was the average increase in basically rate of return for owning a home over longer term periods. Now, we've talked about the huge increases in some cities, but that's not everywhere. And these studies go back

1900, or in some cases, 1950. But both studies were fairly consistent. The average capital appreciation on a home, net of inflation, so real basis is about 1%. The one study compared properties in UK, the other looked at 16 developed countries around the world, and they both found about a 1% per year real return. Both

But the second study also, well, they both did, but the second study is the one I quote, said the returns are actually higher than that because if you own a house and you rent it out, you get the income. So maybe it's only appreciating 1% real per year, but if you're getting the rent. And so they calculate, including the rental income, that the rate of return since 1950 for owning a house was 11.9% annually.

and 7.1% on a real basis. There's a big caveat. And you know this if you own a house. There's expenses that come with owning a house. There's the maintenance cost to keep it maintained. There's homeowner's insurance. There's property taxes. There's mortgage interest. And because it's so difficult to actually get accurate data to calculate the rate of return, that 11.9% nominal rate of return ignores all expenses. The other problem is it's compensated

comparing houses over different years, but we know the housing stock has changed. The quality has improved to some extent because at least the houses are bigger than they were. And they don't adjust for the fact that the average home is now bigger. So part of that 12% annualized return is a recognition of that's across all the houses.

So I thought it would be an interesting analysis, at least for me, to figure out, well, what about in our case, LaPril, in our case? We've owned 14 houses as primary residences since 1993. So that's about a house every two years. We move a lot. And those will be homes in Ohio, Idaho, and Arizona. And it doesn't include homes that we just bought to be fixed.

fixer-uppers and to sell. There were several of those, so I'm not even including that. And I'm not going to include the two homes we have now, our cabin as well as our home in Tucson, because we haven't sold them, so we haven't realized the gain. So just focusing on the 14 homes that we bought and sold, our total realized gain before tax was $201,000 across all 14 homes. That includes $96,000 that we lost

on a new build that we did in Rexburg, Idaho. We moved into that house

pretty much near the top of the housing market in 2005. I thought we were doing okay. We built it for less than $100 a square foot, but we sold it for $80 a square foot in 2013. So we lost close to $100,000 on that. But we gained over $200,000 on our home and farm that we sold in Teton Valley, Idaho. So if we look at the gains and losses in the early years, the gains weren't that great. It might've been $10,000 gain,

When we moved from Ohio to Idaho, we lost on that house, but collectively, $201,000 gain.

But then there's cost. Over that 27-year period, we've paid an estimated $69,000 in property taxes. And that's after taking account the tax deduction for property taxes. So that's net of the tax deduction, $69,000. $31,000 in homeowner's insurance. We estimate that we've spent $59,000 on home maintenance, repairs,

and lawn mowers. It would include lawn service when we've had that. It would include mowing it ourselves. I didn't count for my labor mowing it, but I did take into account the John Deere tractors that we've owned and then sold. And then there was $138,000 in interest that we paid. Again, that's after taking the federal tax deduction for interest. So combined, those

Those expenses and a $201,000 gain, that equates to a $96,000 loss or the total cost of home ownership, including the capital appreciation, minus all the expenses from 1993 to 2020. Now, that was a 27-year period. And so it's about $3,600 per year it cost us to live in a house. Now, we could compare that

to renting, that's only about $300 a month. So if we could rent for $300 a month or less, we would have been better off renting. Except there's one big caveat. We had capital tied up in houses that got us that $201,000 gain before expenses. That's capital that could have been invested elsewhere had we rented.

And in some extent, the capital was pretty big because we paid off our mortgage in 2010. So there's 10 years there where we didn't have a mortgage. So all the capital was in the house and the farm. And I estimate based on if I had earned 5% per year on that capital, that's an additional $450,000.

Essentially opportunity cost because we had invested in houses and it wasn't invested in stocks or bonds or other assets. So if we add the $450,000 capital drag from not having invested in other assets plus the $96,000 loss in terms of the gains plus expenses, that's $546,000 over that 27-year period that it cost $546,000.

to own a house. So $20,222 per year, the total cost of home ownership, including the house itself, as well as the give up of not being able to invest that capital in other areas. That equates to about $1,685 per month, which means if

if we could have rented for less than $1,685, we would have been better off renting. But if our rent was more than $1,685 per month on average, we would have been better off owning. Now that's just us. And probably in our case, we would have been better off owning because of the size of some of the houses, rent potentially would have been more than $1,685 a month. The

The other thing to consider is this doesn't include the gain. I know the gain that we have in our Idaho cabin is meaningful because properties in Teton Valley have gone up so much. We don't have a gain in our house in Tucson at this point, so it excludes our existing homes. That's just one example, but it wasn't necessarily overwhelmingly for buying or renting. It isn't a clear-cut case.

It depends on the environment that you're purchasing in. In our case, we built a house and lost money on it, but in the case of our farm, we bought at a more opportune time.

And so when you buy is very important in terms of where we are. And given the affordability issue right now and the housing shortage for single family homes, while the number of apartments coming online, it could be more advantageous right now to rent. There's also the flexibility issue.

My sons and I were talking about, is it easier to move if you're renting and break the lease contract or is it easier to move if you own a house? It depends.

Certainly, renting can be advantageous in terms of just the cost of maintaining it. My son mentioned that in an apartment that they're at, how quickly the maintenance team, which is very, very good, will come and fix anything. Whereas I know here at our cabin in Idaho, just getting somebody out here, we know we're so far out up in the mountains, it's incredibly expensive to get somebody to come and make a repair.

So does it make sense to rent or to buy? It depends on what type of lifestyle that you want, how much flexibility you want, and it also depends on where you live. We can look at what is the cost of rent, of monthly rent versus the cost of owning a home, assuming there is a home available to own.

But recognize that when you own a home and the total return is going to depend on certainly the home appreciation, which is average 1% real across much of the developed world per year. But in other areas, it's been higher than that. And then it's going to depend on what your costs are. What are the taxes? What is the insurance? And what is the ongoing repair to maintain the home? When I think of all the work that we've done on the homes to

to make only $200,000 over all those years. A lot of those homes were fixer-uppers and we did a lot of work on them and yet could have made a lot more investing in the stock market over time. So ultimately, it depends on the life you want, where you live, whether renting is more advantageous or buying a home. That then is episode 435. Thanks for listening.

Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. I've not provided investment advice. This is simply general education on money, investing, and the economy. Have a great week.